News

NH's New Budget Faces Revenue Challenges

Published Wednesday, November 29, 2017

by JOHN SHEA

While the recently approved state budget allocates funds to a range of programs and services, the availability of many of those funds is far from certain. A large portion of the state’s revenue comes through federal programs that face uncertain futures and state tax revenue that may yield significantly less than expected due to recent rate reductions and policy changes.

Uncertainties for Federal FundingIn FY 2017, about 30 percent of the funding for the state budget came from federal government sources. Federal funding is generally linked to specific programs— predominantly health care, social services,transportation, the environment and a few other areas—that usually require states to provide some matched funding to access the federal dollars.

Current debates in Washington, D.C. regarding the federal budget and programs such as Medicaid, including changes in the mechanisms for allocating funds to the states (such as a per-capita cap or block grants), create pressing questions as to how state services might be affected and whether the state’s revenue system could supplant the loss of federal funding for these programs. Gov. Chris Sununu has publicly acknowledged that NH’s revenue structure would make it difficult for the state to fill large gaps.

For example, Medicaid helped 185,000 NH residents access health care in June 2017: roughly the equivalent of the populations of Manchester, Concord and Dover combined. In FY 2016, Medicaid constituted 29 percent of all state government expenditures funded through federal and non-federal sources. The program covers approximately one in four children in NH, and three in five nursing home residents depend on Medicaid for care.

Cuts in Medicaid funding for school programs could result not just in a reduction in services to youth with disabilities, but also lead school systems to shift resources from other education priorities to fill gaps in legally-mandated special needs programs. Cities and towns may face a choice between reducing overall resources available to students or raising local property taxes to fill funding gaps.

Tax Changes May Limit RevenueIn this year’s session, the legislature voted to reduce the rates of NH’s two primary business taxes over the next four years, adding to phased-in rate reductions passed two years ago. The Business Profits Tax (BPT) will drop from its 2015 rate of 8.5 percent to 7.5 percent in 2021, a 12 percent reduction. The Business Enterprise Tax (BET) rate will drop from the 0.75 percent 2015 rate to 0.50 percent in 2021, which is about a 33 percent decrease.

Using static revenue estimates that do not account for changes in economic activity, the legislature projects a reduction of $11 million in revenue during this budget about $86 million in the next budget and about $81 million in the following year due to lowering the BPT and BET rates. For context, $81 million is the entire amount of state support for the University System of NH.

While some proponents of these tax reductions contend that the lower rates will result in more tax revenue due to increased business activity, this outcome is far from certain or even likely. The BET reduction might also lead to less stable business tax revenue, as the BET’s broader base has historically made it a less volatile revenue source than the BPT.

The changes gradually reduce the BET’s contribution to the General Fund, a fund that allows legislators more flexibility to respond to changing fiscal conditions. By 2021, no BET revenue will be allocated to the General Fund, potentially limiting resources available for future needs.

While the BPT and BET are significant contributors to the General and Education Trust Funds—supplying more than 28 percent of the total revenue in FY 2016—they are not the most significant taxes paid by NH businesses.

According to a study from the Council on State Taxation, in FY 2015, the BPT and BET accounted for under 22 percent of state and local taxes paid by businesses in NH, while property taxes were nearly 49percent of total state and local taxes paid by businesses.

Hard ChoicesEfforts to enhance workforce development, tackle infrastructure and housing challenges, and address education-funding disparities all may require additional resources. Likewise, an economic downturn would require additional resources to meet an array of public needs.

Reductions in federal funding would leave NH with difficult choices and requirepolicymakers to find new resources to ensure adequate funding for programs and services critical to all residents.

John Shea is executive director of the NH Fiscal Policy Institute, an independent, nonprofit, nonpartisan public policy organization based in Concord. Learn more at nhfpi.org.